Ahead of a “super-week” for major central banks around the globe and with central bankers in their “blackout period”, last week was again all about the impact of ongoing developments in energy prices for the monetary policy outlook. As oil prices fluctuate around USD 100/bbl, the outlook for energy prices remains highly uncertain as tensions around the Hormuz strait tend to escalate. With virtually no oil allowed to exit the gulf by sea and land pipelines solutions unable to provide an alternative comparable in scale, each day extends the blow to global oil output.

The risk of this oil price shock for the inflation and growth outlook increases consequently, in parallel with the complexity of the situation facing global central bankers. If ultimately a short-lived price increase, those events might not require specific reactions by central banks, as they will likely look through a temporary blip in energy-related inflation data. But the longer this situation of elevated oil prices last, the higher the risk of seeing energy price increases being passed into other products and services’ prices, and the more consumers and businesses’ inflation expectations could rise. This later scenario would likely warrant a reaction from central banks, as their price stability/moderate inflation target would be threatened.

Addressing a supply-driven inflationary shock with higher rates would have obvious negative consequences for economic growth. Not reacting would threaten central banks’ credibility and potentially create financial market stress by deanchoring inflation expectations and interest rate levels. This dilemma is likely to be reflected in the communication of the Fed on Wednesday, and the ECB, BoE, SNB and BoJ on Thursday. They are all expected to maintain their key rate unchanged but the hints and guidance that they will provide in terms of how they expect to react to the different scenarios for oil prices in the months ahead will be key to assess whether the spectacular repricing in short-term rates expectations since the beginning of the month has to be adjusted.

Credit

Iran war has now entered Day 17, triggering one of the largest oil supply disruptions in history. Despite this shock, the impact on credit spreads has remained relatively contained, supported by yield-sensitive buyers increasing their positions.

However, total returns had another week of negative performance across all credit segments, driven by the rising US Treasury yield and to a lesser extent Bund yield. US investment grade (IG) fell the most of -1.4%. US high yield (HY) and EUR IG dropped -0.7%, and EUR HY -0.8%.

The biggest swing factor for the economy is the duration of the oil shock. Oil price volatility like never before, a peak-to-trough intraday move in Brent of $36. Paradoxically, the biggest release of crude reserves in history last Wednesday saw the oil price ended higher, not lower, on the day. TTF gas price in Europe has been rangebound at EUR50/MWh (mega what hour), is not as high as oil products, might be driven by mild weather in Northwestern Europe.

Even so, the EUR investment grade primary market shrugged off the Middle East conflict, Amazon priced EUR14.5 billion across eight tranches, making the largest ever EUR deal.

EUR IG spreads widened by only one basis point last week, while USD IG spreads even tightened by one basis point. Up-in-quality trades dominated, as higher rated companies tend to be less energy intensive.

EUR investment grade recorded their first outflows after 36 consecutive weeks of inflows. Short-term funds inflow was overshadowed by medium term fund outflow. EUR high yield had a third week of outflow in a row.